Asian Economic Crisis Term Paper

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"Suharto inaugurated an...[exemption] from sales tax and tariffs...the only firm to qualify was an obscure company owned by Suharto's youngest son." Such political interference insured that projects that wouldn't have been considered economically viable received more favorable consideration when a Suharto family member or friend was involved. Additionally, the Indonesian government (as well as the Philippines) was intent on its efforts to maintain low interest rates. Like the baht and ringgit, the Indonesian rupiah and Philippine peso depreciated rapidly in the last half of 1997 and beginning of 1998.

The currency crises in Thailand, Malaysia, Indonesia and the Philippines were so pronounced that it soon had an effect on Taiwan, Singapore and Hong Kong as well. Currency value and the stock markets declined here as well, upon shaken foreign investor confidence.

Japan, in 1996, appeared to be recovering after sluggish growth throughout the 1990s. This optimism was shortlived, however, when signs of trouble first appeared in Thailand and South Korea. Many Japanese banks held large lending portfolios throughout southeast Asia. As other economies faltered, the Japanese economy also suffered. "Banks and firms in South East Asia that had borrowed from Japan were hit by the currency shocks: the financial outlook of Japanese banks and securities firms correspondingly deteriorated." (Pesenti et al., 1998).

It is also worth considering the role the IMF played in helping or hindering the recovery from the 1997/98 Asian economic crisis. When countries of southeast Asia found themselves over-leveraged and unable to meet foreign debt obligations, they turned to the IMF for help. In return for aid, countries had to agree to certain policy condition set out by the Fund. Thailand was the first country to solicit help, and in August, 1997, the IMF approved a loan for 3.9 billion (USD). This agreement stipulated the maintenance of a level of government reserves, the increase of the VAT, government cuts and a restructuring of the financial sector. A second bail-out was necessitated by the sharp decline of the baht, with subsequent aid packages (through 1998) that put further conditions on the Thai government.

Indonesia also approached the IMF for assistance in 1997. Credit was approved with similar conditions that the Thai government had agreed to, including closer oversight for the banking sector. Although few of the strict loan conditions were adhered to, the Indonesian government also received billions in IMF aid.

Korea also relied upon IMF support during the economic crisis of the late 90s. Several aid packages introduced growth targets, and improvement of oversight for the banking industry. The Korean government was called upon to "dismantle the non-transparent and inefficient ties among government banks and business." (Corsetti et al., 1998).

There are many reasons frequently given for the wide reach and severity of the Asian economic crisis. An investment boom in the early- to mid-1990s saw the economies of southeast Asian countries grow rapidly. However, much of this investment was in very speculative areas. Real estate and stock market (margin) investments constituted a high proportion of foreign investment and destabilized the Asian economies when investor confidence changed.

In addition, the currencies of many of these Asian countries had appreciated to unsustainable levels. Many of the countries in question (Thailand, Malaysia, Indonesia...) operated a fixed exchange rate system that artificially maintained their currencies' value. The result of this policy was to create large current account deficits, and set up these economies for monetary speculative attack.

A further problem that exacerbated the Asian currency and economic crisis was the tendency for governments and their central banks to promise bail-outs for foundering companies. The effect of these guarantees on the world market was to enable even more borrowing on the part of an already highly-leveraged society. Furthermore, the borrowing rate for domestic banks abroad was artificially low as a result of this government backing. Coupled with the currency depreciation that most countries were experiencing, this level of foreign debt proved to be too much of a burden.

The 'domino effect' was also seen due to the extreme interconnectedness of the Asian countries' economies. When the currency of one country depreciated, this had a negative effect on the competitiveness of the other countries. So, when the Thai baht began to sink, this had a depreciating effect on other currencies such as the ringgit and the rupiah. For this reason, the spread of the crisis throughout southeast Asia was based on real monetary effects and not solely on investor psychology. "This game of competitive devaluations is an important factor that explains why the currency contagion and the domino effects were driven by fundamental factors rather than irrational contagion." (Roubini, 1998). Market panic certainly played a role, however, as conditions deteriorated from 1997 to the spring of 1998.

The international community also had some responsibility for the severity of the Asian economic crisis. By continuing to lend money to various southeast Asian governments and companies without the requisite risk assessment, foreign banks effectively increased the precarious situation of these economies. Further currency speculation led to an illiquid market that exacerbated the currencies' downward spiral.

The global impact of the Asian economic crisis of 1997/98 is still being felt. Despite speculation that recovery would be swift, the recession in this area lasted beyond 2000. "One of the only positive results of the recession is that the current account is now swinging strongly into surplus." (Khor, 2000). There has also been a call for balance between the trend toward globalization (and financial liberalization) and a careful management of domestic monetary policy. A further result of the Asian economic crisis is a more careful attention to foreign debt levels. Borrowing is watched more carefully, particularly borrowing that is to finance speculative endeavors.

In a time of increased globalization and market inter-reliance it is interesting to consider the causes of the Asian economic crash and how such a crisis might be avoided in the future. It is naive to assume in today's world economy that events that take place around the world won't have ramifications throughout the world markets.